Weekly Commentary 04 August 2021
Weekly Market Commentary
There were strong gains for US and European equities in July, but Asia ex-Japan lagged due to concerns over Chinese technology regulation
July closed out a strong month for European and US equities, while commodities continued to make gains even as the ‘reflation’ trade cooled. Asia ex-Japan equities underperformed, with Chinese indices not helped by risk aversion around tougher regulation being introduced by Beijing in strategically important sectors.
This will be a key week for the US infrastructure bill, which lawmakers hope to pass ahead of the summer recess
A series of central bank meetings are due to be held this week, as well as it being a key week for the US physical infrastructure bill which needs to gather momentum in Congress with the summer recess looming. On the infrastructure bill, US senators have now agreed the text of a bipartisan bill so, barring amendments, lawmakers are hopeful it can pass this week.
In terms of central banks, the Bank of England’s meeting on Thursday will be the week’s highlight. While no change is expected at this meeting, it will need to address CPI inflation, which is currently above the Bank’s formal target. The Bank of England has been more hawkish than some other major central banks. Nonetheless, we expect this meeting to stick to a transitory inflation narrative with a nod to clearer guidance later in the year. The Reserve Bank of Australia is also meeting this week, and it is expected to pause its asset purchase tapering given the ongoing lockdowns in the country.
The US employment report due on Friday will be the last before the Jackson Hole symposium
In terms of data, all eyes will be on the US non-farm payroll report, which will be released on Friday. The US Federal Reserve (Fed) has clearly stated, from the start of the pandemic, that employment levels are a key metric and that space capacity in the labour market was a primary factor for ongoing support. The point often made by Jerome Powell, the Fed’s chair, is that headline employment has improved, but the experience has been very different for lower wage workers. By shifting the requirements to a more balanced jobs recovery, the Fed has caused the bond market to price in only a gradual withdrawal of support over the next 12 months. Given that the tapering discussions have begun, however, and the all-important Jackson Hole meeting is almost upon us, this will be a closely watched employment report.
Despite investors moving into peak holiday season, we have a blockbuster week of central bank policy, fiscal policy, US earnings and key data releases. We still believe the hurdle to shift markets away from their transitory inflation narrative is high, but this will be an important week to test sentiment in the quieter summer weeks.
The Week In Numbers